Attempt to form Greece government fails after shock poll

ATHENS Mon May 7, 2012 11:25pm IST

Greek conservative party leader Antonis Samaras arrives at the headquarters of his party in Athens May 7, 2012. REUTERS/John Kolesidis

Greek conservative party leader Antonis Samaras arrives at the headquarters of his party in Athens May 7, 2012.

Credit: Reuters/John Kolesidis

ATHENS (Reuters) - A first attempt to form a new Greek government collapsed in less than a day on Monday after a shock election which left gaping questions over the country's ability to avert bankruptcy and stay in the euro.

Greeks enraged by the terms of international bailouts which have cut wages, sent unemployment to one of the highest levels in Europe and caused a spate of suicides, deserted mainstream parties in droves in Sunday's poll, plunging their country into uncertainty.

Antonis Samaras, leader of the conservative New Democracy party which won the biggest share of the vote gave up trying to form a government on Monday night within hours of getting a mandate from President Karolos Papoulias.

His efforts were rebuffed by a string of anti-bailout parties who had benefited from the electoral earthquake which sent tremors across the euro zone.

"It was impossible," Samaras told reporters. "I handed back the mandate." The task will now pass to Left Coalition leader Alexis Tsipras, who was catapulted into second place in Sunday's vote on the back of voter anger over the economic hardship.

Finance ministry officials told Reuters Greece could run out of cash by the end of June if there was no government to negotiate a new aid tranche with the EU and IMF.

Both New Democracy and Socialist PASOK were devastated by the election, in which Greeks voted against the two traditional ruling parties who had imposed economic hardship in exchange for an EU/IMF bailout to avert a sovereign default.

Earlier, Tsipras scathingly rejected the offer of joining a unity government with Samaras.

"We're not going to let in through the window what Greek people kicked out the door," he said adding that the bailout "did not bring salvation but caused tragedy".

Tsipras said he would try to create a leftist government, although he appears not to have the numbers. He will receive a three-day mandate on Tuesday.

New Democracy and PASOK, who have ruled Greece for decades, ended the election with too few seats to form a new government. PASOK will get a turn if Tsipras fails, but after that new elections would have to be called within weeks if no government is cobbled together.

PASOK was pushed into third place in the election, dropping from 44 percent in the last poll in 2009 to a humiliating 13 percent.

INVESTORS RATTLED

The election result rattled investors, sending the euro to a three-month low and safe haven German government bond futures to record highs, although the index of top euro zone shares reversed early losses to head into positive territory, suggesting alarm about Greece's ability to harm the wider euro zone was muted.

Fotis Kouvelis, leader of the moderate Democratic Left party that had looked like a possible ally for Samaras, earlier told Reuters he would not cooperate with New Democracy and PASOK but only leftwing groups.

Another group, the conservative splinter party Independent Greeks, refused even to enter talks with Samaras.

PASOK leader Evangelos Venizelos, who arranged Greece's second 130 billion euros bailout, said it should be renegotiated to lessen the burden on suffering Greeks by spreading the cuts demanded under the package over three years instead of two.

In the face of what looks like an intractable impasse, another election in a few weeks could be the only way out, deepening doubts about Greece's future.

"Country in Limbo" said a headline in the Imerisia newspaper. "Nightmare of Ungovernability" said Ta Nea daily.

Many Greeks seemed shocked at what they had done in an election that increased fears of a return to the euro zone debt crisis first sparked by Greece in 2009.

"I'm hopeful but also scared," said 36-year-old Sofia Tsaliki, an office clerk. "New elections won't bring anything, but at least we are giving a message to the politicians and Europeans that they need to take proper notice and cannot ignore us any more."

Analysts expressed deep gloom about Greece's fate with Citigroup saying the odds of an exit from the euro zone had risen to between 50 and 75 percent from 50 percent previously.

"It seems that yesterday's election not only complicated but significantly escalated even the near term outlook in Greece," said Gillian Edgeworth of UniCredit. She said calling new elections would mean at least six weeks of uncertainty.

FRAGMENTED PARLIAMENT

With counting from Sunday's vote complete, New Democracy and PASOK had won just over 32 percent of the vote and only 149 out of 300 parliament seats. PASOK won a landslide in the last election in 2009 with 44 percent of the vote.

Greece's parliament will be the most fragmented for decades and the only route to a workable coalition looks like some kind of row-back on the terms of the bailout, something which lenders and northern European countries firmly reject.

"Either they stick to the programme and receive the financing from member states or they will have to default," a senior euro zone source told Reuters.

"They must continue to uphold the measures they have pledged in the programmes," Swedish Finance Minister Anders Borg said.

Time is short for Greece which must give parliamentary approval next month for over 11 billion euros in extra spending cuts for 2013 and 2014 in exchange for more aid to stay afloat.

Sassan Ghahramani, CEO of New York-based hedge fund advisers SGH Macro said: "The best outcome you can get at this point is an unstable government.

"What is happening in Greece has reopened the wild card of euro zone stability ... if it left the euro zone there would be contagion, pressure on the rest of Europe that is vulnerable."

Costas Panagopoulos, head of ALCO pollsters, said a highly unpredictable repeat election was the most likely scenario with the parties playing a blame game over the next 10 days before giving up. "I cannot see how they can form a coalition government," he said.

But another pollster, head of MRB group Dimitris Mavros, said the anti-bailout parties may not want another election because the outcome was so uncertain, and voters could swing back to traditional parties because of fears of being forced out of the euro.

Greeks overwhelmingly support membership of the single currency.

"Greeks don't want to risk leaving Europe but they also want to send a message that following these policies monotonously cannot be tolerated," Mavros said, suggesting the victory of Francois Hollande in Sunday's French presidential election may make Greeks bolder in demanding an end to austerity.

(Additional reporting by Harry Papachristou, Deepa Babington, Dina Kyriakidou, Ingrid Melander and George Georgiopoulos.; Writing by Barry Moody; editing by Mike Peacock)

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